How Lenders Decide Whether Or Not to Accept Home Equity Loan Applications

Everybody would like to know how lenders decide whether or not to accept home equity loan applications. There is difference between home loans, and home equity loan applications. Home equity loans resemble second mortgages, as the homeowner is able to withdraw his equity in the home. This equity is built over years and is better known as capital appreciation. Therefore, a home purchased in the year 2000 for $100,000 would fetch much more than $100,000 by 2009, or even 2005. If the homeowner had purchased the home in 2000 by taking a home loan of $90,000, repayable in 15 years, then substantial amount of that 90,000 is also paid by 2009.

Effectively, the homeowner has both the capital appreciation and the principal repaid forming the home equity that he/she can cash out. Though the equity built in this property may be substantial, lenders allow the homeowner to avail only part of this home equity.

Factors that affect lenders' decisions are:

• Age of the borrower
• Borrower's credit score
• Employment record
• Income
• Family size
• Liabilities
• Retirement savings
• Age of the residence

The age of the borrower is an important criterion because home equity loans are repaid over a long period. If the borrower is nearing retirement, then it is unlikely that he/she would have adequate income at retirement to repay the loan amount.

Lenders have a network through which they become aware of borrowers' promptness in paying any dues. Therefore, if a borrower has been irregular in repaying home loans or other loans, then chances of lenders rejecting his application for a home equity loan are much higher. Similarly, if the borrower has been changing jobs once too often, then the lenders become skeptical about actually getting their money from the borrower.

Income of the borrower is another issue. If the borrower has enough equity, but does not have enough income to cover any installments on it, then the amount of home equity loan may be confined to the extent that the borrower can repay. At times, this may even be nil. Family responsibilities also affect the lender's decision. Age of the children matters as higher education is costlier, and the borrower may not be able set aside the equated monthly installment as expected. Likewise, if the borrower already has too many liabilities, it might be unwise on the part of lender to lend some more money to the borrower for purposes other than clearing the outstanding loans. Age of the building is important because the borrower may have to show some rental income to arrive at loan eligibility levels, but such income may not be there in future.

Though retirement savings such as 401k and IRA in the United States cannot be brought under bankruptcy proceedings, the lender would still be interested in these savings, as in the worst-case scenario; the borrower may choose to pull out funds from these savings to avoid foreclosure.

This is how lenders decide whether or not to accept home equity loan applications. There are no predefined biases, nor any random selection of applications. All applications are closely scrutinized to identify whether or not the borrower can really repay the loan that he/she is seeking.

Home Equity Line of Credit or Home Equity Loan?

If you have been a homeowner for more than a few years, you will have equity built up on your home no matter what kind of mortgage payment plan you have. Equity is the difference between what you owe on your home and what you could sell it for on the current market. If your home is appraised at $180,000 and you only have $80,000 owed on the property, you have $100,000 available in your home. If you are looking for debt consolidation options, opening a home equity line of credit could be perfect for you.

Refinancing your home in this way can save you money because you can get better rates and help you establish a payment plan that fits better with your current financial situation. The question in your mind may be whether to get a line of credit or a home equity loan. Home equity loans acquired at a fixed rate can be very attractive, as they can serve as tax write-offs, feature interest rates that are below market averages, and have longer periods of time to repay the loan. Understand that home equity loans serve as a second mortgage on your home, and like the first mortgage, you will be given certain terms and a repayment period of between 10 to 20 years.

A home equity line of credit is different from a home equity loan in that the interest rate can change over time and the term begins when you decide to start using the proceeds from the line of credit. Variable interest rate loans are ideal if you need a lower introductory rate. Stated another way, if you hope and expect to not need to use a large percentage of the loan amount, a variable interest rate is best. Fixed rates are also offered if your plan is to pay off other large debts with high interest rates. In this case, it could take years to pay off your line of credit to the lender, but it will end up costing you less than if you had to pay off all of your other debts separately.

In your decision making, consider the fact that home equity loans are usually selected for one-time expenses like a home improvement job while a line of credit may be opened to pay for recurring expenses. To view competitive rates and get no obligation quotes, visit one of the many quality mortgage sites online today.

Can Equity Release & a Mortgage Co-Exist?

More commonly, people inquiring about equity release have an existing mortgage or loan still secured on their home.

However, for an equity release scheme to be accepted by the lender, the mortgage or secured loan balance must be fully repaid.

In order to ascertain whether the mortgage can be repaid by an equity release we need to know the valuation of the property & the age of the youngest property owner (minimum age is 55).

Once established, as long as the figure calculated is at least the size of the current mortgage, then the equity release can be applied for.

Even in situations where the full mortgage balance cannot be effectively be reached by releasing equity, if the difference can be found by way of additional funds such as existing savings/investments, then the application can still proceed.

The major benefit of being in a position to pay off the mortgage is that no more monthly payments will be required in the future.

This will alleviate any financial pressures of maintaining the mortgage payments maybe at a time of redundancy, retirement through ill-health or severe debt issues.

Potentially, this course of action would avoid the issues of repossession & even incurring an adverse credit record.

Nevertheless, it must be bourne in mind the consequences of this course of action.

Yes there are no more monthly payments, however the interest that would normally have been repaid is instead added to the mortgage balance. This has the effect of an ever increasing debt that effectively doubles every 10-11 years, dependent on the interest rate obtained.

There may be concern that this equation would, & can, have the effect of eroding the value of ones estate, especially given the fall in property prices recently.

However, the optimists amongst us would assume that over the longer term property values will recover & escalate over time.

Effectively this would counter the roll-up effect of the increasing equity release balance.

Unfortunately, we would not know the full extent of this & hence the reason for the inclusion of the no negative equity guarantees built into these SHIP regulated schemes.

This ensures that any beneficiaries cannot be saddled with any personal debt, with the worse case scenario effectively being that the lender takes the value of the property; no more.

For these reasons from a lifetime mortgage lenders point of view, they do not permit any second charge as there maybe no security left for the subsequent lender in case of default.

Why a second charge would want to be placed given there maybe no future equity remaining anyway would be a questionable issue.

Therefore in summary, anyone looking at taking out equity release must be able to redeem any existing mortgage with the new lifetime mortgage being the only secured loan on the property.

The Advantages of a Manufactured Home Equity Loan

Also called a second mortgage a home equity loan is a good way to tap into the value you have built up in your manufactured home. These types of loans are normally capped at $100,000 but the main limiting factor is the amount of equity you have in your home. The interest is also tax deductible just like that of a first mortgage.

Home equity loans come in two basic types; the fixed rate and the line of credit. The terms for both similar and are normally required to be paid off in 5 to 20 years. The loan will also need to be paid off if and when you sell your home.

The main difference between these two types of loans is how they are paid out to the borrower.

With a fixed rate home equity loan the borrower get a lump sum payment for the face value of the loan. The interest rate is fixed with set monthly payments that remain the same for the life of the loan.

A line of credit usually has a variable interest rate and is set up to function in much the same way a pre-paid credit card works. In fact many lines of credit come with a credit card that allows the borrower to tap into the account whenever needed. Once the borrower starts using the money monthly payments will start and are based on the current interest rate and how much money was borrowed that month. Once the life term of the loan is up any outstanding balance must be paid in full.

One advantage of getting a manufactured home equity loan is the ability to get a large amount of money in a short amount of time. This money can be used for a multitude of things including home improvement projects, paying off another loan, college tuition, and other expenses that come unexpectedly.

One of the most common uses for a home equity loan is debt consolidation. By transferring all your debt to one loan you will have one monthly payment at a much lower interest rate then found on those nasty credit cards.

These types of loans come with one danger; your home is the collateral and if for any reason you fall behind on or fail to make payments the lender can start foreclosure proceedings. This is why anyone considering using the equity in their home in this manner needs to thoroughly research and understand the terms of the offer the lender is making.

Getting an equity loan on your manufactured home can be a good financial tool if it is used correctly. The advantages and disadvantages must be weighed carefully before making a final decision to determine if such a loan is right for you.

HOME :: Finance / Home-Equity-Loans Home Equity Line of Credit Options By Tom Peters Article Word Count: 338 [View Summary] Comments (0) Ads by Goo

One of the many loans available on the market is the home equity line of credit. This type of loan maybe suitable for some people where they have built up a substantial amount of equity in their home and now they need some extra cash, that had not been budgeted for previously. Although you may have a lot of equity built into your home, ensure that you only borrow what is absolutely necessary, otherwise all that hard work you have done in the preceding years in building up the home equity will have been wasted.

Home Equity Line of Credit is often known as HELOC. This type of loan allows you to borrow up to a pre-approved amount. The pre-approved amount is usually a revolving line of credit, which means as you pay off some of the outstanding balance, this amount is then available again to be borrowed in the future, if required. The lender will access your credit file and if the credit file shows a good credit history they will usually approve a ongoing line of credit up to 80% of the equity you have built up in your home.

The lender may offer you different payments options, the variable interest rates should have a cap documented in the loan documents. The different payment options are usually the repayment of interest only or repayment of principal and interest. At any one time the payment amount is based on what you have actually borrowed, not on the line of credit available to you. One of the issues that you may face if you select a interest only repayment, is that the outstanding principal amount that you have borrowed needs to be repaid at some stage. If the loan is on a fixed term then the principal needs to be paid before the loan term expires. This has caught quite a few people out over the years and this could cause a significant financial issue, if it happens to you and you cannot afford to repay the principle.